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Learn more about Business Contracts in India

Our collection of legal documents and contracts regulated by Indian law is intended for use by both Indian nationals and international enterprises looking to invest in or export to India. India chose English as its legal system and as its primary commercial language. Nonetheless, there are legal and cultural variances, and local legal counsel is usually suggested. While it is true that India adopted its legal system from the English and that the principles and rules of common law as known in England prevail to a large extent in India, several adaptations in the law and a business culture unique to India necessitate caution when entering into a contract for sale to ensure protection in the event of breach. Foreign firms often take the lead in creating contracts in commercial contacts between worldwide and Indian firms, which must, however, be customized to Indian practice and regulation.

Table of contents

What are the business contracts laws in India?

The Indian Judicial Structure establishes an integrated court structure to administer both national and state legislation. The Indian legal system is organized in a pyramidal structure, with the Supreme Court at the top, a High Court in each state or group of states, and a hierarchy of subordinate courts underneath the High Courts. According to Article 141 of the Indian Constitution, what the Supreme Court declares is binding on all courts within India’s borders. In addition to courts, tribunals are given judicial or quasi-judicial powers by Special Statutes to resolve conflicts or disputes in certain areas.

Any contract for the sale and export of products to India would be regulated by The Sale of Goods Act, 1930 (“Goods Act”) and the general principles of The Indian Contract Act, 1872 (“Contract Act”). These Acts are mostly based on English legal ideas. Any export to India is a contract of sale of products in which the seller transfers or promises to transfer ownership of the items to the buyer in exchange for a price. The Goods Act distinguishes between’sale’ and ‘agreement to sell.’ In a ‘Sale,’ the property is immediately transferred from the seller to the buyer. An ‘Agreement to Sell’ specifies that the transfer will take place at a later date or subject to specific criteria being met. When the specified time period expires or the circumstances under which the property is to be transferred are met, a ‘Agreement to Sell’ becomes a ‘Sale.’

What are the most commonly used Business Contracts?

In economic contacts between international and Indian enterprises, foreign corporations normally take the lead in drafting contracts, which must, however, be tailored to Indian practice and legislation. The Indian party will review the foreign party’s draft contract and rework what it perceives to be the most relevant sections.
The following are the most typical contracts used by foreign businesses doing business in India:

1. Sales Contract: A Sales Agreement is used to define payment terms, delivery, item(s) sold to a customer by a person or a company.

2. Service Agreement: A Service Agreement is used to define the deadlines, payment terms, work to be performed for a client by a company or freelancer who will provide services.

3. Shareholder Agreement: A Shareholders Agreement describes how the company should be operated and outlines shareholders’ rights and obligations.

4. Share Purchase Agreement: A Share Purchase Agreement is used to sell a specific number of a target company’s shares to a buyer for a specified price.

5. Consulting Agreement: A Consulting Agreement outlines the services a consultant or an independent contractor will perform for a client and ensures he gets paid.

6. Partnership Agreement: A Partnership Agreement outlines the management of a partnership and the rights, duties, ownership interests and profit shares.

7. Power of Attorney: A Power of Attorney template is used to authorize someone to represent you or act on your behalf in legal matter.

8. Minutes of Meeting: A Minutes of Meeting template helps you to keep all important resolutions at shareholder or board of director meetings.

9. Loan Agreement: A Loan Agreement is used when a lender lends money to a borrower in exchange for repayment plus interest.

10. Non-Disclosure Agreement (NDA): A Non-disclosure Agreement (NDA) is used to protect confidential information by prohibiting the recipient from disclosing, communicating, copying, modifying or using it without the owner’s permission.

What are the differences between agreement and contract?

How a contract and an agreement vary from one another. This will assist you in summarizing and mapping all of the major concepts that you have grasped.

A legally binding agreement is called a “contract” and must impose some sort of legal obligation. A contract is only legally binding if it is legally enforceable. Every contract is also an agreement.

An agreement is a commitment or a series of promises that are not contradictory and that are accepted by all parties involved. An agreement must be socially acceptable. It may or may not be legally enforceable and does not create any legal liability. An agreement is not always a contract.

How to draft a Business Contract?

Anyone who want to develop their firm must have excellent business relationships. Business relationships flourish when precise terms and conditions are agreed upon by both parties and those terms are followed.

So, for every commercial transaction, the parties must be unambiguous, which is only achievable if they have a formal agreement in place. This type of agreement is known as a Business Agreement/ Commercial Agreement/ Trade Agreement.

These Commercial Agreements/Trade Agreements are any contractual arrangement between the parties relating to their business interactions. Trade treaties can be bilateral or multilateral, that is, between two or more parties.

There are a number of litiguities and terminology that must be considered while establishing an agreement. And drafting requires practice. As a result, every new business should get legal counsel before writing any commercial or trade agreements. Because agreements carry the conditions for a longer length of time, these are the only agreements that propel a company/business to new heights.

Entering into a contractual business partnership with another party is a significant undertaking that should be undertaken only after careful consideration of the relationship we desire with the other party. As a result, one should avoid entering into agreements hastily or with total faith in the other person.

Even if it is a family member, the business contract should prioritize protecting our own company interests. As a result, one must become acquainted with some of the key aspects for writing a company contract. Things to consider while establishing an agreement:

Agreements must be in writing: Avoid oral agreements and always have them on paper, stamped and signed.
Language to be used: Because most people believe that having English in agreement is a need, the language to be used is "English." Should utilize the language that is most comfortable for them.
Detailed Agreements: Every term and condition should be detailed, with no space for ambiguity, so that in the event of a disagreement, the parties are on the same page. As a result of ambiguous wording or clauses, disagreements frequently emerge.
Maintain Confidentiality: When entering into a business contract, the other party frequently gains access to and insight into your business practices and potential trade secrets. If you do not want the other party to share this information, attach a provision that prohibits the other party from exposing your business information or contract information to other parties.
➤ To include explicit Termination terms
State Laws Applying to the Contract: Contracts can specify which state's laws will apply in the case of a disagreement. If the other party is situated in another state, insert a phrase stating which state's laws will apply. If you don't, and there's a disagreement, there might be a whole new legal fight (costing more money) over which state's laws should be applied to the contract. Avoid this issue by agreeing to it at the start of the contract, when both parties are on board.

The following principles must be kept in mind while entering into any agreement:

➤ Ease of use
➤ Lucidity
➤ Future-oriented
➤ Alternatives
➤ Definitions
➤ Short and simple phrases

Aside from the foregoing, some other provisions must be followed while entering into any Business/ Contract arrangement. They are as follows:

Stamp Papers (Stamping): All agreements must be written on stamp paper. The stamp duty levied on various sorts of agreements varies by state.

Attestation or Witnesses: Under Indian law, some agreements must be authenticated by two witnesses.

Notarization: In India, notarization of a contract refers to authentication by a Notary Public.

Agreement Registration: Although registration of agreements is not required by law, it is recommended in order to provide the agreement legal legitimacy and enforceability in a court of law.

Apostille by Indian Embassy: All foreign agreements signed in countries other than India must be legalized through the apostille procedure, in which the agreement is attested and validated by the Indian Embassy/consulate in that nation.

What are the challenges Indian businesses face?

Some of the most important concerns with Indian contracts are discussed here. It should be noted that some of the problems raised in this legal context are equally relevant to the negotiation of business agreements in general. These notes deal with contract formulation and signing under Indian law, as well as business procedures in the nation.

1. Date

The date is generally at the beginning of the document, although it is usually the final item to be finished because it is usually dated when all parties have signed it. However, work under an agreement may begin before – or maybe some time after – the date specified in the agreement.

This can be addressed in the contract’s text. For example, there is a stated “Commencement Day” in our Agency Agreement (Doc IN101) that indicates the date on which execution of the Agreement begins.

2. Parties

Please include complete and accurate information below. The specifics will differ depending on whether the contracting party is a business, partnership, individual, or some other organization, and whether the party is situated in India or another nation.

3. Foreign Exchange Requirements

One or both parties may be required to comply with exchange control regulations prior to engaging into a contract. Such compliance should be subjected to appropriate audits.

4. Withholding taxes

According to Indian income tax legislation, tax can be withheld on any money paid to a foreign person. While negotiating the Agreement, provisions of the Double Taxation Avoidance Treaty should be considered.

5. Automatic Early Termination

When there is an Indian counterparty, it is best to make Automatic Early Termination applicable. In other words, the contract should have a clause that allows a party to end it under particular conditions. However, caution should be exercised in drafting the events that constitute a bankruptcy event because it is quite common for a creditor (particularly in India) to issue a bankruptcy notice and, at times, institute proceedings more as a pressure tactic on the debtor than in the hope of succeeding in the proceedings.

6. Bankruptcy

In India, like in the United Kingdom, the term “bankruptcy” refers solely to individual instances. Companies are either “wrapped up” or “liquidated.” In the case of claims against a corporation in liquidation, Indian courts would regard a foreign counter-naked party’s exposures as an unsecured obligation, and any such claim would be subordinated to secured creditors and other statutory dues. As a result, it is prudent to include protections that give leading signs, allowing a foreign counterparty to terminate before a liquidation order is issued or a liquidator is appointed.

7. Stamp duty

Some papers must be duly stamped in order to be enforced. As a result, the foreign counterparty should make certain that it is properly stamped in compliance with Indian legislation.

8. Number of signed contract copies

It is customary for each contracting party to keep one original. Thus, if there are two parties, two original copies should be signed, with one kept by each. A contract is only valid if the requisite requirements to constitute a legally enforceable agreement between the parties are followed. If in doubt, get legal counsel from a lawyer in the relevant jurisdiction.

9. Witnesses to signatures

The primary reason for having a signature witnessed by a third party is for evidentiary purposes. The witness would be able to affirm that the signature on the agreement is truly the signature of the named party.

Although it is generally recommended to have a contract proved by witnesses in India, a contract may be effective without any signatures being witnessed. In certain countries, the contract must be signed in front of a notary public in order to be legally binding. Because various countries have different regulations, always double-check the position before the contract expires.

When a signature is witnessed, the witness should write their name in block capitals and provide their home address in addition to signing.

What are dispute resolution and arbitration?

Even if foreign law is adopted as the governing law, choosing litigation as the mechanism of conflict resolution is not recommended. Most orders issued in other jurisdictions (for example, New York) are not recognized in India. Arbitration would be a favored method of conflict resolution, particularly because international arbitral rulings are recognized and enforced in India.

The Indian Judicial Mechanism’s Dispute Settlement Mechanism consists of resolution of conflicts through courts and statutory tribunals; resolution of issues through conciliation or arbitration as alternatives to courts and tribunals.
In India, the arbitration structure is predicated on maximal party liberty with minimal court interference. Arbitration is widely accepted in India as a quick and cost-effective method of resolving disputes.

The majority of arbitral services for the resolution of commercial or commercial disputes of international nature are provided for the Federation of Indian Chambers of Commerce and Industry (FICCI) by the FACT (FICCI Arbitration and Conciliation Tribunal), which has its headquarters in New Delhi and Arbitration Courts in major cities across the country. If the parties want to resolve their disputes in a Court of Arbitration outside of India, the London Court of International Arbitration or the Singapore International Arbitration Center are typically employed.

Based on the key issues raised above, it is clear that when it comes to drafting and signing international contracts in India, commercial practices are fairly similar to those in Western countries (particularly the United Kingdom) and are based on the basic principles of Common Law, albeit with some significant differences; it should also be noted that when specific issues or questions between the parties arise, legal advice should be sought.

Unpaid invoices

In addition to sureties, it is also possible to protect oneself against unpaid invoices by certain specific clauses. The penalty clause specifies the rate of damages and interest due by the debtor in case of delay or failure to meet his obligation. Framed by the Indian civil and commercial code, a judge can control the clause: it can be judged derisory or excessive. How to properly evaluate the amount of the penalty? To avoid the risk of having the clause revised, it is more than advisable to consult a lawyer.

For a seller to a buyer, the retention of title clause allows the seller to retain full ownership of the property until the buyer has paid in full. It is a way to ensure that the goods are delivered in full. The goods will not become the property of the buyer until the full price has been paid. To be valid, however, this clause must comply with certain formalities, namely acceptance by both parties of the contract, its establishment before the delivery of the goods. The immobilization allowance is a clause in a unilateral promise to sell. The seller of reasonable reserves this property to the buyer without the letter committing to purchase it.

It is then possible, for this reserve, to ask for an indemnity to compensate the seller if the buyer withdraws. In order to fully understand the clauses applicable to your contract and which will best protect you, do not hesitate to seek the assistance of a contract law professional.

Contractual clauses and protection in case of dispute

In addition to the prevention of unpaid bills, some clauses allow to anticipate the dispute in a more general way by focusing on the dispute as such:

➤ The jurisdiction clause specifies the jurisdiction that will be competent in case of a dispute. It allows to prevent the judge's decisions by limiting the scope of his control
➤ The termination clause specifies that in case of non-performance of the obligation by one of the parties, the contract is cancelled without the intervention of a judge. This clause is not valid for all contracts

Poorly drafted, these clauses are generally impractical: to ensure that disputes are correctly anticipated, a legal professional will find the most appropriate clause for each business contracts.

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